A Comparison of US and EU Derivative Market Reforms

Transcription

1 A Comparison of US and EU Derivative Market Reforms How will key Dodd-Frank and EMIR provisions differ in substance and timing? 18 September 2012 [10.00h EDT and 16.00h CET]

2 Introduction Hume Brophy - Management-owned government and regulatory affairs firm with offices in Brussels, London, Paris and Dublin strong team based in Brussels and drawn from law practices, industry, government and national regulators. - Specialise in agri-business, energy and financial services policy and advise a wide range of clients including asset managers, banks, commodity traders, investment firms, platforms and regulated markets. Page 2

3 Introduction Delta Strategy Group - Boutique US government affairs and strategic consulting firm based in Washington, DC. - Professionals with over 30 years of government service and strong ties to both political parties. - Specialize in derivatives policy on a broad range of issues for exchanges, energy and agribusiness companies, global trading firms, pension funds, asset managers, and other Fortune 500 companies. Page 3

4 A comparison of US and EU derivative market reforms Structure of webinar presentation 1. Approach to regulation 2. Scope of clearing mandates / obligations 3. Exemptions from clearing mandates / obligations 4. Treatment of inter-affiliate / intra-group transactions 5. Reporting obligations 6. Extraterritorial application of clearing mandates / obligations 7. Other key issues 8. Question and answer session Page 4

5 1. Approach to regulation US Derivatives Title of Dodd-Frank is focused on Swap Dealers ( SDs ), Major Swap Participants ( MSPs ). SD Determination: qualitative with a de minimis exception. - SD (i) holds itself out as a dealer in swaps; (ii) makes a market in swaps; (iii) regularly enters into swaps with counterparties as an ordinary course of business for its own account; or (iv) engages in any activity causing it to be commonly known in the trade as a dealer or market maker in swaps. De minimis: entities engaging in less than $8B in annual aggregated gross notional will not be required to register (excludes hedging and trading) Mandatory SD Registration will begin January 1, 2013 (pushed back from October 12, 2012). MSP Determination: entirely quantitative; intended to capture those whose positions are large enough that it justifies increased regulation. Mandatory MSP Registration begins on October 12, Page 5

6 1. Approach to regulation EU EMIR clearing obligations apply primarily to financial counterparties. No SD equivalent in EMIR. Article 2(8) EMIR: defines financial counterparty with reference to eight Directives in force. Definition includes both UCITS funds and management companies. Definition includes Alternative Investment Funds (AIFs) but unclear whether AIF subsidiaries or SPVs included. Scope of clearing obligations affected by proposed changes to exemptions set out in MiFID 2 proposal. Page 6

7 2. Scope of clearing mandates US Clearing obligation applies to all swaps subject to the clearing mandate between parties that are not exempt. Determination of swaps subject to clearing will be made by the CFTC by asset class, starting with rates and credit. Swaps subject to the clearing mandate must be cleared through a registered DCO. Page 7

8 2. Scope of clearing obligations EU Clearing obligations may apply to any OTC derivative contract per Articles 2(5) and (7) EMIR. Clearing obligations will only be mandated after a CCP has been authorised to clear a class of OTC derivatives. Authorisations notified to ESMA, which will determine if a clearing obligation ought apply on criteria. Article 1 CRI (OTC): lists criteria to be assessed by ESMA. N.B. existing clearing agreement for European index, single-name CDS. No big bang date, ESMA s initial focus likely to be rates, credit. Page 8

9 2. Scope of clearing mandates / obligations timeline August begin review of interest rate and credit default swaps for mandatory clearing Phasing in of clearing of rates and credit begins Mandatory clearing of rates and credit for category 1 entities Mandatory clearing of rates and credit for category 2 entities Mandatory clearing of rates and credit for category 3 entities EU technical standards 16 August EMIR entry into force Review of first classes of derivatives for mandatory clearing Authorisation of CCPs and registration of TRs Mandatory clearing for first set of derivatives expected 01 January target entry into force of relevant L2 measures Page 9

10 3. Exemptions from clearing mandates US Non-financial end users. - Must be hedging or mitigating commercial risk. - Must notify CFTC as to how they generally intend to meet their financial obligations with regard to those swaps. Inter-affiliate swaps. Page 10

11 3. Exemptions from clearing obligations - EU Non-financial counterparties not exceeding threshold - Article 10 EMIR: cut-off threshold for clearing for non-financial counterparties - EUR 1 billion for credit and equity derivatives - EUR 3 billion for interest rate, FX and commodity derivatives + others - Calculation excludes hedging positions - Breach one, clear all approach is highly contentious Intra-group transactions Pension funds (three year derogation, conditional) Page 11

12 4. Treatment of inter-affiliate transactions US Apply to swaps between majority-owned affiliates (includes swaps between a financial affiliate and a counterparty as well as counterparties that are both majority owned by the same third party). Exempts the swap from clearing, subject to conditions, including that both parties elect not to clear the swap. Does not exempt the swap from variation margin or reporting requirements. Page 12

13 DSG HB Webinar - 13 September Treatment of intra-group transactions EU Intra-group transactions by both financial and non-financial counterparties exempted from clearing obligations. Exemption subject to Article 3 EMIR conditions, including restrictions on counterparties established outside the EU. Exemption from collateralisation subject to positive decision by national competent authorities and other Article 11 EMIR conditions. Portfolio reconciliation and compression requirements still apply to all intragroup transactions. Unclear if intra-group transactions would count towards threshold. Page 13

14 5. Reporting obligations US Complicated phasing by type of market participant and asset class Reporting hierarchy DCOs SEFs/DCMs SDs/MSPs Non-SD/MSPs Asset class Interest rates and credit FX, equity, other asset classes Real-time public reporting for certain data fields; all other is reported to SDRs and not made public. Page 14

15 5. Reporting obligations EU Article 9 EMIR: obligation to report details of transaction to a TR applies respectively to counterparties and CCPs. Obligation is delegable to a third entity. Report must identify the beneficiary of the contract if not a counterparty. Report must detail the exchange of collateral with different provisions if exchanged on individual contract or portfolio basis. Specific requirements set out in Annex 1 of the draft RTS. Timing: expected first-stage requirement from 01 July 2013 for all contracts open on or agreed after 16 August Page 15

16 5. Reporting obligations timeline Oct mandatory reporting by SDs, MSPs of rates and credit begins Jan mandatory reporting by SDs, MSPs for all others begins Apr mandatory reporting by non-sds/msps for all others begins EU technical standards Registration of TR 60 days after registration of TR if no TR registered before 01 May July 13 start of reporting requirements when TR registered before 01 May July 15 reporting obligation to ESMA even if no TR registered 01 January target entry into force of L2 measures 16 August EMIR entry into force Page 16

17 6. Extraterritorial application of clearing mandates US CFTC issued Proposed Interpretive Guidance for comment on July 12, 2012 regarding the cross-border impacts of Dodd-Frank rules. Applicable to swap contracts entered into by 3rd country entities transacting with a U.S. Person as defined in the guidance, regardless of domicile. Applicable to swap contracts entered into by US Swap Dealers regardless of the domicile of the counterparty. Applicability to other swap contracts will be dependent upon either party s relation to a US parent/person and substituted compliance (comparable regulation) in another country. Page 17

18 6. Extraterritorial application of clearing obligations EU Article 4(1)(a)(iv)-(v) extend the clearing obligation to transactions entered into by certain third country entities. Three key conditions: (1) subject to obligation if EU-established, (2) direct, substantial and foreseeable effect, and/or (3) prevent evasion. Article 4(4) EMIR: tasks ESMA with developing draft RTS to assess/define latter two conditions. No draft RTS published on 25 June, speculation on reasons for delay. Hope amongst some European market participants that delay may facilitate negotiations with US to avert competitive application. Page 18

19 7. Other key issues Margin requirements Collateral Straight through processing Position limits Trading mandate / requirement Page 19

20 Questions and comments Scott Parsons Partner Delta Strategy Group T: +1 (202) C: +1 (202) E: Conor Foley Partner Hume Brophy T: +32 (0) M: +32 (0) E: Page 20